The traditional argument is rising yields are bad for gold. Usually, it is true. There is a negative relationship between gold and interest rates. Investors have a choice of holding their wealth in many ways. One is in currency like the US dollar, the euro or the yen. Second is in precious metals like gold and silver. If we invest in gold, we are not getting any interest. In fact, it costs money to store physical gold while another alternative of holding gold is in demat form like ETFs namely the SPDR Gold shares charge expenses which also add to the cost. The alternative of holding your wealth is in saving account or in low risk bonds which will give you interest. So, when interest rates rise, yields on savings accounts and bonds also rise which makes a gold less attractive investment as an opportunity cost of holding your wealth in gold also rises. An Interest rate is a key element that helps determine the intrinsic price of gold. The other elements are storage cost and insurance. Combine all these elements and you will get the price of the commodity. After that how the price moves depends on micro drivers like the movement of US Dollar and fundamental factors like demand and supply. The relation between gold and yield is better explained in a chart. If we look at from the year 2000, gold was increasing steadily while US 10-Year Treasury yield was decreasing. However, in last 10 years, the correlation between two assets has become stronger.The last 10 year chart shows the peak and trough in gold and 10-year US Treasury yield. Historically we have seen that gold thrives when yields are trading at the bottom. In fact, we can predict the top and bottom of gold by looking at the 10-year yield chart. Now the question is why 10 year yield and not 2-year or 5-year yield. The chart below shows the relationship between 2- Year US Treasury yield and gold prices. As we can see the inverse relation is not as prominent as it was in 10-year US Treasury yield. Courtesy- ET

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